11/16/2016
Should you co-sign for someone who asks?
(I donāt like the odds)
As a bankruptcy attorney, I would say that the answer to this question is probably not. Of course, if you do, thatās OK because it may well lead to some new business for a bankruptcy attorney. We often file bankruptcy for individuals and couples who were āhelpedā into bankruptcy by assisting friends and family with their financial problems. If asked to co-sign, consider the following:
Why does this person NEED for me to co-sign for them?
Most of the time, it is because someone else has determined that they are not credit-worthy. Someone who probably knows a lot more about general credit-worthiness than you do and a lot more about the personās finances. You may feel that you know this person better but donāt say I didnāt warn you if (when) things go wrong.
If you are determined to consider co-signing for someone, then consider why they are unable to get credit on their own. Now you may be thinking that this will be an uncomfortable question and how could you possibly justify asking for such personal information. But wait, isnāt this person asking you to co-sign a loan for them. It does not seem unreasonable for you to ask questions about their financial status and even for a look at their credit report before putting your credit on the line to assist. If this information is none of your business and you are uncomfortable asking, then you would not necessarily be doing this person a favor by co-signing for them.
Often, a credit denial is the same sort of blessing as an unanswered prayer. It may be that your friend needs financial counseling or information rather than a new car. You may be enabling the person asking for an assist to further their own financial ruin while giving them the opportunity to drag you down with them. If they need a debt management plan or are on the sure road to bankruptcy, co-signing might just put them in the express lane to bankruptcy rather than helping them. It is often one last straw that forces someone to file for bankruptcy, and many of our clients remain unaware of the gravity of the situation until on the verge of bankruptcy.
Unless you are familiar with this personās entire situation, then you do not know if they have different unexplored alternatives that might be better for the person asking and put you at less risk. Lenders are anxious to finance new cars but may be willing to finance a less expensive car with no co-signer but a higher down payment. Perhaps loaning them funds for an inexpensive well-used vehicle would be a better plan, particularly for a new car owner who may not be familiar with budgeting for the additional expenses of a new and financed vehicle, such as full coverage insurance.
You might better serve the interests of both the asker and yourself by encouraging your credit-challenged friend to explore the best means to resolve any financial issues such as by referring them to a credit counselor or bankruptcy attorney to determine their best options moving forward. Those who have long-standing issues are often surprised to find that bankruptcy may improve credit scores. An experienced credit counselor can advise as to what options are available and recommended. If your credit-challenged friend has little or no credit history, you may help them on their way to establishing or re-establishing their credit by loaning a small amount that they can use to establish a credit builder account or a secured credit card. This gives them a means to boost their credit score and establish credit of their own.
Donāt do it for the relationship
How close a relationship do you have (or want to have) with the person asking for a co-sign? Before agreeing to co-sign for a close relative, think about what it will be like sitting at the Thanksgiving dinner table together if the debt is not repaid. Are you prepared to lose a friendship over co-signing a loan? One of the things that amaze me about the situation which occurs when there is a default is that the Debtor is often just as angry or angrier about the situation as the person who co-signed. Often the Debtor will simply ghost the person who co-signed the now problematic debt.
Per a survey published on Creditcards.com, one in four regretted the decision because they ended up paying for some or all the bill for which they co-signed. Further, 26% say their relationship with the person they were trying to help was damaged because of co-signing. This indicates that a decision to co-sign should not be made for the good of the relationship.
Whatās at Stake?
When you co-sign for someone who are putting your money and your credit rating at risk to the full extent of the loan and its payment terms. It is very difficult to negotiate enough protection.
If the primary obligor on the loan defaults, you are responsible for the entire debt according to the terms of the contract. Before you commit, you should carefully consider whether you can afford to pay this debt in addition to any other debts you are responsible for and your other living expenses. Should there be a default, the creditor could ask you to commence the regular payments due if there is a default and that option is still available. Otherwise, you may be stuck with options such as catching up significant amount past due or paying for additional expenses such as the costs of late fees or even repossession.
It is problematic that a co-signer often finds out about the default only after their credit has been damaged. One late payment can cause an unexpectedly high dip in a credit score. It may take months to discover the problem unless you are carefully monitoring your credit reports or affirmatively keeping in touch with the lender. Those who have co-signed often have little or no practical or legal rights regarding the collateral for the loan. Your interests may be adverse to the person for whom you co-signed, placing you at odds. For instance, the debtor may want to retain a vehicle for as long as possible to preserve a form of transportation while your interests might be better served by a prompt sale or repossession that recovers the value of the vehicle for the creditor as quickly as possible.
Even in situations where you trust the individual, keep in mind that by co-signing you are entering a long-term (often three to five years or longer) relationship with this person, one for whom there are no good exits in the event of a problem. If the Debtor loses their job, gets in an accident, trusts the wrong person, moves or otherwise develops a problem that affects their ability to pay the debt (or care for the collateral) you have a problem.
Even where your Debtor does not default, there is a real cost in terms of your own credit score for co-signing a debt for someone else. That debt becomes a part of your responsibilities from a credit point of view. This means that if you are seeking to borrow for some other purpose, this debt is counted against you for purposes of what income you have available to debts of your own. Agreeing to co-sign for someone impairs your own credit position and could result in your application for refinancing or other credit rejected, approved only with a higher down payment or you could be offered less attractive terms such as higher interest rates. There is a real cost to allowing someone to use your credit by co-signing even when something goes wrong.
Contact us for assistance.
Assistance may include representing you if you choose not to take this advice (I promise not to say I told you so.) or you may want to send your friend or family member who is requesting a co-signed for assistance in how to improve their credit profile.
